Does your local telnet client tell you it's operating in
character and not line mode? telnet can operate in either.
I find that when I connect to non-telnet servers, my telnet
client is in line mode, which would explain why your server
is "waiting" for newlines -- it's actually only seeing full
lines from the client, not characters. To see your telnet
client's current mode, escape into telnet command mode and
issue the status command.